Forecast | Peak cheap oil triggers renewable era: Future of Energy P2

You can’t talk about energy without talking about oil (petroleum). It’s the lifeblood of our modern society. In fact, the world as we know it today couldn’t exist without it. Since the early 1900s, our food, our consumer products, our cars, and everything in between, has either been powered by or entirely produced using oil.

Yet as much as this resource has been a godsend for human development, its costs to our environment are now beginning to threaten our collective future. On top of that, it’s also a resource that’s beginning to run out.

We’ve lived in the era of oil for the past two centuries, but now it’s time to understand why it’s coming to an end (oh, and let’s do it without mentioning climate change, since that’s been talked about to death by now).

What is Peak Oil anyway?

When you hear about peak oil, it’s usually referencing the Hubbert Curve theory from way back in 1956, by Shell geologist, M. King Hubbert. The gist of this theory says that the Earth has a limited amount of oil that society can use for its energy needs. This makes sense since, unfortunately, we do not live in a world of elven magic where all things are unlimited.

The second part of the theory states that since there’s a limited amount of oil in the ground, there will eventually come a time where we will stop finding new sources of oil and the amount of oil we suck out of existing sources will “peak” and eventually drop to zero.

Everyone knows peak oil will happen. Where experts disagree is when it will happen. And it’s not hard to see why there’s a debate around this.

Lies! Oil prices are falling!

In December of 2014, the soaring price of crude oil tanked. While the summer of 2014 saw oil flying at a price of around $115 per barrel, the following winter saw it plummet to $60, before bottoming out at around $34 in early 2016.

A variety of experts weighed in on the reasons behind this fall—The Economist, in particular, felt the price drop was due to a variety of reasons, including: a weak economy, more efficient vehicles, continued oil output in the troubled Middle East, and the explosion of US oil production thanks to the rise of fracking.

These events have shed light on an inconvenient truth: peak oil, in its traditional definition, realistically won’t happen anytime soon. We still have another 100 years of oil left in the world if we really wanted it—the catch is, we’ll just have to use more and more expensive technologies and processes to extract it. As world oil prices stabilize at the end of 2016 and begin to rise again, we’ll need to reassess and rationalize our definition of peak oil.

Actually, more like Peak Cheap Oil

Since the beginning of the 2000s, world prices for crude oil have gradually risen nearly every year, with the exceptions being the 2008-09 financial crisis and the mystery crash of 2014-15. But price crashes aside, the overall trend is undeniable: crude oil is becoming more expensive.

The main reason behind this rise is the exhaustion of the world’s cheap oil reserves (cheap oil being oil that can be easily sucked up from large underground reservoirs). Most of what’s left today is oil that can only be extracted through noticeably expensive means. Slate published a graph (below) showing what it costs to produce oil from these various expensive sources and at what price oil has to become before drilling said oil becomes economically viable:

As oil prices recover (and they will), these expensive sources of oil will come back online, flooding the market with an ever more expensive supply of oil. In reality, it's not geological peak oil we need to be afraid of—that won’t happen for many decades to come—what we need to be afraid of is peak cheap oil. What will happen once we reach the point where individuals and entire countries can no longer afford to overpay for oil?

'But what about fracking?’ you ask. ‘Won’t this technology keep costs down indefinitely?'

Yes and no. New oil drilling technologies always lead to productivity gains, but these gains are also always temporary. In the case of fracking, every new drill site produces a bonanza of oil initially, but on average, over three years, production rates from that bonanza fall by up to 85 per cent. Ultimately, fracking has been a great short-term fix for the high price of oil (ignoring the fact that it’s also poisoning groundwater and making many US communities sick), but according to Canadian geologist David Hughes, US production of shale gas will peak around 2017 and fall back to 2012 levels by around 2019.

Why cheap oil matters

‘Okay,’ you tell yourself, ‘so the price of gas goes up. The price of everything goes up with time. That’s just inflation. Yeah, it sucks that I have to pay more at the pump, but why is this such a big deal anyway?’

Two reasons mainly:

First, the cost of oil is hidden inside every part of your consumerist life. The food you buy: oil is used to create the fertilizer, herbicides, and the pesticides sprayed on the farmland it’s grown on. The latest gadgets you buy: oil is used to produce most of its plastic and other synthetic parts. The electricity you use: many parts of the world burn oil to keep the lights on. And obviously, the entire world’s logistics infrastructure, getting food, products, and people from point A to point B anywhere in the world, at any time, is largely powered by the price of oil. A sudden price spike can cause massive disruptions in the availability of products and services you depend on.

Second, our world is still very much wired for oil. As hinted in the previous point, all of our trucks, our cargo ships, our airliners, most of our cars, our buses, our monster trucks—they all run on oil. We’re talking about billions of vehicles here. We’re talking about the entirety of our world’s transportation infrastructure and how it’s all based on a soon-to-be-obsolete technology (the combustion engine) that runs on a resource (oil) that’s now becoming more expensive and is increasingly in short supply. Even with electric vehicles making a splash in the market, it could take decades before they replace our existing combustion fleet. In all, the world is hooked on crack and it’s going to be a bitch to get off it.

A list of unpleasantness in a world without cheap oil

Most of us remember the global economic meltdown of 2008-09. Most of us also remember that pundits blamed the collapse on the bursting US subprime mortgage bubble. But most of us tend to forget what happened in the lead up to that meltdown: the price of crude rose to nearly $150 per barrel.

Think back to what life at $150 per barrel felt like and how expensive everything became. How, for some people, it became too expensive to even drive to work. Could you blame people for suddenly not being able to pay their mortgage payments on time?

For those who didn’t experience the 1979 OPEC oil embargo (and that’s many of us, let’s be honest here), 2008 was our first taste of what it feels like to live through an economic stroke—particularly should the price of gas ever rise above a certain threshold, a certain ‘peak’ if you will. $150 per barrel turned out to be our economic suicide pill. Sadly, it took a massive recession to drag global oil prices back to Earth.

But that’s the kicker: $150 per barrel will happen again sometime in the mid-2020s as production of shale gas from US fracking begins to level off. When that happens, how will we deal with the recession that’s sure to follow? We’re entering into a kind of death spiral where whenever the economy strengthens, oil prices surge upwards, but once they rise between $150-200 per barrel, a recession is triggered, pulling the economy and gas prices back down, only to start the process all over again. Not only that, but the time between each new cycle will shrink from recession to recession until our current day economic system seizes up entirely.

Hopefully, that all made sense. Really, what I’m trying to get at is that oil is the lifeblood that runs the world, shifting away from it changes the rules of our global economic system. To drive this home, here’s a list of what you can expect in a world of $150-200 per barrel of crude:

Price of gas will rise during some years and spike in others, meaning transportation will burn an increasing percentage of the average person’s annual income.

Costs for businesses will rise due to inflation in product and transportation costs; also, since many workers may no longer be able to afford their long commutes, some businesses may be forced to provide various forms of accommodation (e.g. telecommuting or a transportation stipend).

All foods will rise in price around six months after gas prices rise, depending on the state of the growing season when the oil spike happens.

All products will rise in price noticeably. This will be especially noticeable in countries that heavily depend on imports. Basically, take a look at all the things you’ve bought over the past month or two, if they all say ‘Made in China,’ then you’ll know your wallet is due for a world of hurt.

Housing and skyscraper costs will explode since much of the raw wood and steel used in construction are imported over long distances.

E-commerce businesses will experience a punch to the gut as next day delivery will become an unaffordable luxury of the past. Any online business that depends on a delivery service to deliver goods will have to reassess its delivery guarantees and prices.

Likewise, all modern retail businesses will see a rise in costs associated with a drop in efficiency from its logistics infrastructure. Just-in-time delivery systems are dependent on cheap energy (oil) to work. A rise in costs will introduce a range of instability into the system, potentially pushing modern logistics back by a decade or two.

Overall inflation will rise beyond governments’ control.

Regional shortages of imported foods and products will become more common.

Public outrage will mount in western countries, putting pressure on politicians to bring the price of oil under control. Aside from allowing a recession to occur, there will be little they can do to lower the price of oil.

In poor and middle income countries, public outrage will turn into violent riots that will lead to increased incidents of martial law, authoritarian rule, failed states and regional instability.

Meanwhile, not-so-friendly oil producing nations, like Russia and various Middle East countries, will enjoy a glut of new found geopolitical power and income that they will use for ends that are not in the West’s interests.

Oh, and to be clear, that’s just a short list of awful developments. I had to cut the list down to avoid making this article epically depressing.

What your government will do about peak cheap oil

As for what world governments will do to get a handle on this peak cheap oil situation, it’s hard to say. This event will impact humanity on a similar scale to climate change. However, since peak cheap oil’s effects will happen on a much shorter timeframe than climate change, governments will act much faster to address it.

What we’re talking about is game changing government interventions into the free market system on a scale not seen since WWII. (Incidentally, the scale of these interventions will be a preview of what world governments may do to address climate change a decade or two after peak cheap oil.)

Without further ado, here’s a list of said interventions governments may employ to protect our current global economic system:

Some governments will try releasing portions of their strategic oil reserves to lower prices for their nations’ oil. Unfortunately, this will have minimal impact as most nations’ oil reserves would only last for a few days at most.

Rationing will then be enforced—similar to what the US implemented during the 1979 OPEC oil embargo—to limit consumption and condition the population to be more frugal with their gas consumption. Unfortunately, voters don’t much like being frugal with a resource that was once relatively cheap. Politicians looking to keep their jobs will recognize this and press for other options.

Price controls will be attempted by a number of poor to middle-income countries to give the appearance that the government is taking action and is in control. Unfortunately, price controls never work in the long run and always lead to shortages, rationing, and a booming black market.

Nationalization of oil resources, particularly among those countries that still produce easy to extract oil, will become far more common, crippling much of the Big Oil industry. The governments of those developing countries that produce the lion's’ share of the world’s easily extractable oil will need to appear in control of their national resources and may enforce price controls on their oil to avoid nationwide rioting.

The combination of price controls and oil infrastructure nationalizations in different parts of the world will only work to further destabilize world oil prices. This instability will be unacceptable to larger developed nations (like the US), who will find reasons to intervene militarily to protect the oil extracting property of their private oil industry abroad.

Some governments may enforce a heavy rise in existing and new taxation directed at the upper classes (and especially the financial markets), who may be used as scapegoats seen as manipulating world oil prices for private gain.

Many developed nations will invest heavily into tax breaks and subsidies for electric vehicles and public transportation infrastructure, push legislation that legalizes and benefits car sharing services, as well as force their auto manufacturers to accelerate their developments plans of all electric and autonomous vehicles. We cover these points in more detail in our Future of Transportation series.

Of course, none of the above government interventions will do much to relieve the extreme prices at the pump. The easiest course of action for most governments will simply be to look busy, keep things relatively calm through an active and well-armed domestic police force, and wait for a recession or minor depression to trigger, thereby killing consumption demand and bringing oil prices back down—at least until the next price spike occurs a few years later.

Luckily, there is one glimmer of hope that exists today that wasn’t available during the 1979 and 2008 oil price shocks.

All of a sudden, renewables!

There will come a time, late into the 2020s, when the high cost of crude oil will no longer be the cost-effective choice for our global economy to operate on. This world changing realization will push a grand (and largely unofficial) partnership between the private sector and governments worldwide to invest unheard of sums of money into renewable sources of power. Over time, this will lead to a declining demand for oil, while renewables become the new dominant energy source the world runs on. Obviously, this epic transition won’t come about overnight. Instead, it will happen in stages with the involvement of a variety of industries.

The next few parts of our Future of Energy series will explore the details of said epic transition, so expect some surprises.